HOG: Strong Value, but Beware a Cyclical Downturn

Linked here is a PDF copy of my detailed analysis of Harley-Davidson Inc (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Harley-Davidson, Inc. (HOG), through its subsidiaries, produces heavyweight motorcycles, and various motorcycle parts and related accessories in the United States and internationally.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. HOG is trading at a discount to all but 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, HOG is trading at a 37.4% discount. A Star is added since HOG is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. HOG earned three Stars in this section for 1.), 2.) and 3.) above. HOG's rolling 4-yr dividend growth averaged over 15%, it has grown dividends for at least 10 years (14+ years) and its 1-year growth rate is greater than its 5-year growth rate.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. HOG earned 2 Stars in this section. HOG's NPV MMA Diff. is $144,456, which far exceeds the $10,000 I look for. Future dividend growth will likely decrease from the 20+% HOG shareholders' have recently enjoyed, lowering the future NPV MMA Diff.

Other: HOG is a member of the S&P 500, is not an Aristocrat, but is an Achiever. 2007 was a tough year for HOG. Sales revenues declined 9% and earnings per share dropped 5%. Sales in the U.S. will likely be weak in 2008. Large inventories will likely remain an issue as consumers face concerns about slower economic growth and job security. Free cash flow and cash reserves at 3/31/08 are should sufficient to maintain HOG's dividend through 2008.

Conclusion: HOG earned a Star in the Fair Value section, picked up three Stars in the Dividend Analytical Data section and earned 2 Stars in the Dividend Income vs. MMA section for a net total of six Stars. However, my scale tops out at five Stars, which rates HOG as a 5-Star BUY.

This is an interesting stock with a strong international brand, but definitely cyclical (people don't buy motorcycles when they are concerned about losing their jobs). It is a stock worthy of future consideration. I have added HOG to my watch list.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not own shares of HOG (0.0% of my Income Portfolio).

Comments

[mallarde]

There has been a lot of good discussion about this stock in past articles. I have commented on some of the risks -- aging fan base, luxury product appealing to audience with normal incomes, and overexposure of brand.

Domestic side looks ugly and overseas offers ray of hope.

Any comments on recent uptrend? Just tracking the Dow?

This company sure puts out enough press releases.